The House of Representatives and the Senate have each presented their own version of the Tax Cuts and Jobs Act, the GOP's tax reform bill. Unfortunately, the House and Senate versions of the bill are radically different in several areas, meaning that Congress will have to reconcile these two bills before submitting one to the White House for the president's signatur. Here are some of the more dramatic differences that legislators will have to find a way to resolve.
1. Tax brackets
Perhaps the biggest single difference between the two versions of the Tax Act is their treatment of income tax brackets for individual taxpayers. The Senate bill, like the current tax code, has seven different income tax brackets (although the brackets are different from existing tax brackets both in the rates and in the income limits for each bracket). The House bill, on the other hand, has a mere four income tax brackets: 12 percent, 25 percent, 35 percent, and 39.6 percent.
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2. State and local tax deduction
Both tax reform bills significantly reduce the state and local tax (SALT) deduction for individuals. The House bill retains the property tax deduction, capping it at $10,000, but gets rid of the rest of the state and local taxes deduction. The Senate bill completely eliminates the SALT deduction for individual taxpayers. Both bills do allow businesses to continue to deduct state and local taxes.
3. Child Tax Credit
Both versions of the Tax Act repeal personal exemptions and seek to make this up by increasing the Child Tax Credit. However, they do so in slightly different ways. The House bill increases the existing Child Tax Credit of $1,000 per child to $1,600 per child. It also adds a "family flexibility credit" of $300 for non-child dependents. The Senate bill increases the Child Tax Credit to $1,650 per child and raises the age limit for qualifying children by one year, and it creates a $500 credit for non-child dependents.
4. Medical expense deduction
Under current tax law, individual taxpayers can deduct qualified medical expenses as an itemized deduction. The Senate bill doesn't change medical expense deductions, but the House bill completely repeals the deduction.
5. Estate taxes
The estate tax is a federal tax placed on property transferred after death. Not all property is subject to estate taxes; an exclusion of the first $5 million of the estate was established for the 2010 tax year, and it has increased due to inflation in the years since. Both the House and Senate bills double the $5 million exclusion (and then increase it for inflation to catch it up to the present year). The Senate bill stops there, but the House bill then repeals the estate tax entirely after 2024. It also lowers the gift tax top rate to 35%.
What comes next for tax reform
The House version of the tax reform bill has successfully passed through the House of Representatives and will now go before the Senate for a vote. Meanwhile, the Senate is still ironing out the details of its own tax reform bill, after which it will vote on that bill as well.
Assuming that both bills pass Congress, legislators then face the task of coming up with a unified version of the two bills. They may choose to send the bills to a conference committee made up of both House and Senate members, who will face the task of coming up with a compromise version; or they may take the more informal approach of proposing amendments back and forth between the two houses until they settle on an agreed-upon version.
In either case, once a single version of the Tax Cuts and Jobs Act has been reached and voted up by both houses, the bill will be sent to President Trump. If he signs the bill, it will become law; if he vetoes it, it will be sent back to Congress.
The GOP has set the ambitious goal of having a tax reform bill on the president's desk by the end of 2017. If a version of the bill becomes law, it will likely take effect for the 2018 tax year. That means that when you do your taxes for 2017 early next year, you will use the existing tax law regardless of what's happened with tax reform. But the following year, we may see some pretty major changes in how we do our taxes.
